Why OPEC's losing its ability to set oil prices

U.S. shale oil will replace the Organization of the Petroleum Exporting Countries as the first-mover "swing producer," according to a Goldman Sachs report from the weekend—meaning OPEC is losing its power to set global prices for crude.

Saudi Arabia, the world's largest oil exporter, no longer has "the ability to push prices lower than the production costs of U.S. shale" because any cuts from the kingdom would "accommodate the further expansion of U.S. shale, as well as reduce Saudi profits," Goldman said.

The shift in pricing power became apparent to Goldman when U.S. shale's spare capacity, at around 5 million barrels per day, exceeded Saudi Arabia's spare capacity of 1.5 million. Spare capacity refers to the amount of crude a country is able to produce in 30 days in case of an emergency.

This trend has been a long time coming, but the tipping point started this year with significant cuts in West African oil exports to the U.S., said John Kilduff, energy analyst and founding partner of commodities investment firm Again Capital. U.S. shale oil has replaced West African imports, which have been redirected to Asia.

The balance was further tipped toward the U.S. when production rebounded in Libya and Iraq despite political instability, adding to an already oversupplied market, Kilduff added.

OPEC pumped 30.6 million barrels of crude oil per day in September, a jump of 400,000 barrels from August that was driven by the Libyan output rebound, found Platts, a global energy information service.

OPEC’s next move

The group will likely cut production when the core countries meet in Vienna on Nov. 27, according to Kilduff. "OPEC is in the process of playing chicken with the market," he said. "But their hand will be forced and they will eventually cut, with the Saudis taking on the bulk of it."

OPEC has absorbed lower oil prices up until this point, declining to cut output in a bid to maintain market share.

"The main reason why OPEC is not cutting production is they realize that U.S. shale is a serious threat to their global oil space," Flynn said.

The cyclical nature of the oil industry makes it unlikely that OPEC has lost its price-setting power permanently, Kilduff said: "There's a boom, bust and a new era upon us all the time. So, the jury's still out on the long-term sustainability of U.S. shale production."